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Actuarial Status and Future Prospects for Social Security
Discussion with Drake University and Iowa Actuaries Club
Stephen C. Goss, Chief Actuary
Social Security Administration
March 26, 2012
2
Social Security Financial Situation and Options
1) Social Security’s Role in Retirement Income
2) The Financial Outlook for Social Security
3) Why the Rise in Cost over the Next 20 Years?
4) Options for Getting OASDI in Long-Range Balance
5) Doing It Better This Time
3
1) Social Security’s Role in Retirement Income
Only one of the three legs of the stool
But is the only leg for about one third of retirees
And is more than half for about two thirds
Defined Benefit, Life annuity, CPI indexed
Efficiency??? Over 99 percent “loss ratio”
What level of retirement income does it provide?
4
1) Social Security’s Role in Retirement Income
Scheduled Monthly Benefit Levels as Percent of Career-Average
Earnings by Year of Retirement at age 65
0
10
20
30
40
50
60
70
1940 1960 1980 2000 2020 2040 2060 2080
Low Earner ($19,583 in 2011; 25th percentile)
Medium Earner ($43,518 in 2011; 56th percentile)
High Earner ($69,629 in 2011; 81st percentile)
Max Earner ($106,800 in 2011; 100th percentile)
Source: 2011 OASDI Trustees Report
5
1) Social Security’s Role in Retirement Income
Scheduled Monthly Benefit Levels as Percent of Career-Average
Earnings by Year of Retirement at age 62
0
10
20
30
40
50
60
70
1960 1980 2000 2020 2040 2060 2080
Low Earner ($19,583 in 2011; 25th percentile)
Medium Earner ($43,518 in 2011; 56th percentile)
High Earner ($69,629 in 2011; 81st percentile)
Max Earner ($106,800 in 2011; 100th percentile)
Source: 2011 OASDI Trustees Report
6
1) Social Security’s Role in Retirement Income
PAYABLE Monthly Benefit Levels as Percent of Career-
Average Earnings by Year of Retirement at age 62
0
10
20
30
40
50
60
70
1960 1980 2000 2020 2040 2060 2080
Low Earner ($19,583 in 2011; 25th percentile)
Medium Earner ($43,518 in 2011; 56th percentile)
High Earner ($69,629 in 2011; 81st percentile)
Max Earner ($106,800 in 2011; 100th percentile)
Source: 2011 OASDI Trustees Report
7
2) The Financial Outlook for Social Security
OASDI Annual Balances 2011TR Intermediate Assumptions:
Trust Fund (Off-Budget) Perspective: Total Income minus Total CostUnified Budget Perspective: Dedicated Tax Income minus Cost
-150
-100
-50
0
50
100
150
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Bill
ion
s o
f C
urr
en
t D
olla
rs
Total Income minus Cost Non-interest Income minus Cost Dedicated Tax Income minus Cost
2011 Tax
Holiday Effect
2012 Tax
Holiday Effect
8
2) The Financial Outlook for Social SecurityCombined OASDI Reserves Exhaust by 2036; DI Sooner
Social Security Trust Fund Ratios Assets as Percent of Annual Cost
Trustees Report Intermediate Projections
0%
50%
100%
150%
200%
250%
300%
350%
400%
450%
1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040
OASDI 2011TR
OASI 2011TR
DI 2011TR
OASDI 2010TR
OASI 2010TR
DI 2010TR
Historical
DI
OASI
OASDI
Tax Rate Reallocation
9
2) The Financial Outlook for Social SecurityProjected Cost, Income, and Expenditures as Percent of Taxable Earnings
0%
5%
10%
15%
20%
25%
2005 2015 2025 2035 2045 2055 2065 2075 2085
Calendar year
Cost: Scheduled and payable benefits
Income
Payable benefits as percentof scheduled benefits:2011-35: 100%2036: 77%2085: 74%
Cost: Scheduled but not fully payable benefits
Expenditures: Payable benefits = income after trust fund exhaustion in 2036
10
3) Why the Rise in Cost Over the Next 20 Years?
OASDI Cost as Percent of GDP 1975-2085 2011 Trustees Report Intermediate Assumptions
0
1
2
3
4
5
6
7
OASDI
OASI
DI
Baby Boomers reach ages 45-64
in 2010
11
3) Why the Rise in Cost Over the Next 20 Years?3.3 workers per beneficiary since 1975; only 2 by 2035----WHY?
Covered Workers Per OASDI Beneficiary
0123456789
10
1940 1960 1980 2000 2020 2040 2060 2080
Low Cost
High Cost
Demographic Change
Program Matures
12
3) Why the Rise in Cost Over the Next 20 Years?Not mortality improvement after 2010-----something else
Aged Dependency Ratios, 2011 Social Security Trustees Report
Intermediate projection compared to no mortality improvement after 2010
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
0.45
1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030
Year
Ag
ed
De
pe
nd
en
cy R
ati
o
No increase in Life
expectancy after 2010
Intermediate Projection
Aged dependency ratio
13
3) Why the Rise in Cost Over the Next 20 Years?Shift in Birth Rate from almost 3 per Woman to Just 2 Since 1975
U.S. Total Fertility Rate: With and Without Adjustment for Survival to Age 10
0
1
2
3
4
5
1875 1885 1895 1905 1915 1925 1935 1945 1955 1965 1975 1985 1995 2005
Ave TFR Ave AdjTFR1875-1925 3.67 2.851926-1965 2.84 2.691966-1990 1.99 1.951991-2003 2.01 1.99
TFR
AdjTFR
14
4) Options for Getting OASDI in Long-Range 4) Options for Getting OASDI in Long-Range BalanceBalance
Ultimately—reduce benefits 25%, Ultimately—reduce benefits 25%, increase income 33%, or some combination!!increase income 33%, or some combination!!
It’s All About Demographics…Average retiree benefit is about $1,000/month3.3 workers have been sharing cost of $300 eachBut paid 13.6% over cost 1990-2008, $341 each
When 2 workers pay same $341 each, then average retiree apparently gets $682 per month, or 32% less. But shortfall after 2040 is 25%, NOT 32%, because1) NRA increases again under PL2) Revenue from tax on benefits is rising3) Average benefit rises slower than average earnings with increasing longevity---more COLAs put benefits further below the general standard of living of current workers
15
4) Options for Getting OASDI in Long-Range 4) Options for Getting OASDI in Long-Range BalanceBalance
Recent Commissions and Congressional Recent Commissions and Congressional ProposalsProposals Raise Payroll tax at the top---increase the $110,100 taxable
maximum
Raise Revenue on the middle---make employer-sponsored group health premiums taxable
Reduce benefits for retirees and not disabled---increase normal retirement age Exceptions for long career low earners?
Reduce benefits for all, or most---reduce the benefit formula factors Can make reductions only, or mainly for higher average earners
Lower benefits mainly for the oldest old---reduce the COLA
Ultimately our elected representatives will decide What benefits---at what cost for complete list of options and plans: http://www.ssa.gov/OACT/
16
5) Doing It Better This Time5) Doing It Better This TimeCongress has always acted in time---but we can do better Congress has always acted in time---but we can do better
Social Security Trust Fund Assets (end of year) 1957-2009
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007
Pe
rce
nt
of
GD
P
1983 Amendments
1977 Amendments
Payroll Tax Rate rises from 6% in 1961 to 9% in 1971
as Program Matures
1972 Amendments
Trust Fund Assets Build, Holding Down
Publicly Held Debt
17
5) Doing It Better This Time5) Doing It Better This Time
The 1983 Amendments extended Trust Fund Solvency
But scheduled benefits were not sustainable with the scheduled taxes
Sustainable Solvency---The Solution
Requires solvency through 75 years---AND
Reserves stable as percent of Program Cost in 75th year
Developed in 1994-6 in response to 1983 Amendments
1994-6 Advisory Council, and Bob Kerry and Alan Simpson
This Challenge has been addressed by virtually every proposal since 1995
18
5) Doing It Better This Time5) Doing It Better This Time—encourage delayed —encourage delayed benefitsbenefits
Age When Benefits Start
Age 62 63 64 65 66 67 68 69 7062 $750 CPI-indexed dollars
63 $750 $80064 $750 $800 $86665 $750 $800 $866 $93366 $750 $800 $866 $933 $1,00067 $750 $800 $866 $933 $1,000 $1,08068 $750 $800 $866 $933 $1,000 $1,080 $1,16069 $750 $800 $866 $933 $1,000 $1,080 $1,160 $1,24070 $750 $800 $866 $933 $1,000 $1,080 $1,160 $1,240 $1,320
75 $750 $800 $866 $933 $1,000 $1,080 $1,160 $1,240 $1,32080 $750 $800 $866 $933 $1,000 $1,080 $1,160 $1,240 $1,32085 $750 $800 $866 $933 $1,000 $1,080 $1,160 $1,240 $1,32090 $750 $800 $866 $933 $1,000 $1,080 $1,160 $1,240 $1,32095 $750 $800 $866 $933 $1,000 $1,080 $1,160 $1,240 $1,320100 $750 $800 $866 $933 $1,000 $1,080 $1,160 $1,240 $1,320105 $750 $800 $866 $933 $1,000 $1,080 $1,160 $1,240 $1,320
Present Valueat Age 62 $153,170 $153,622 $156,111 $157,619 $158,031 $159,344 $159,453 $158,450 $156,424Female born 1950Real interest 2.9%
Office of the Chief Actuary/SSA February 22, 2012
Social Security Retired Worker Monthly Benefit with PIA of $1,000 Per Month
19
Best Use of Personal Savings and DC Accumulation?
Four Options for $500,000 at 65: Annual Income and Remaining Assets at Death
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
$450,000
$500,000
65 70 75 80 85 90 95 100 105
Age at Death
Ass
ets
Rem
ain
ing
(C
PI-
ind
exed
to
ag
e 65
)
Option 1: No Annuity--Spend to Last to Age 110;
$19,447/year
Option 2: Buy Life Annuity at 65; $32,669/year
Option 3: Spend to 84 then Buy Annuity at
85; $26,014/year
Option 4: Buy 20-Year Deferred Annuity at 65
and Spend to 84; $28,492/year